Financial distress continues to play out in markets around the globe. Government intervention (or “semi-nationalization” -- take your pick) continues to unfold in the market, particularly in halls of Washington and Westminster. The week saw the U.S. and U.K. records for quarterly loses adjusted to the upside and the largest rights offering ever. However, not everything is doom and gloom. The week also saw a noticeable uptick in M&A and a spattering of bankruptcy asset sales, and showed that government intervention can create pretty good workflow for legal professionals. For more on each of the events shaping today’s business law environment, please follow the Related Resources.

Bankruptcy

Fortunoff, the tri-state luxury retailer, announced that it Chapter 22 filing will end in Chapter 7. A consortium of liquidators including Great American Group, Hudson Capital, SB Capital, Tiger Capital, and jewelry liquidators Bobby Wilkerson Inc. and The Gordon Co. are liquidating the firm’s $212 million inventory.

Lehman Brothers’ effective liquidation continued with the management-led and Harbourvest Partners-backed buyout of Lehman Brothers Venture Partners.  The $750 venture capital fund will be renamed Tenaya Capital. The terms of the transaction were undisclosed.

Station Casinos’ restructuring wheel of fortune continues. The Vegas casino giant has been playing bankruptcy roulette since it skipped certain interest payments last month. The company announced today, which is incidentally the last day it had to cure the breach, a forbearance agreement with note holders and its secured lenders. The company also extended the voting deadline for solicitation of acceptances for its prepackaged bankruptcy plan. Boyd Gaming Corp, another Vegas-based casino company, decided that Station’s woes could be the jackpot.  Boyd has offered to buy almost all of its rival’s operating assets. Oddly enough, Boyd would like to avoid the assets securing the Station’s commercial mortgage backed security (CMBS) financing and the Company’s $250 million land loan. However, the would-be acquirer is willing to consider an acquisition of the assets securing the CMBS financing. Station is considering the proposal.

Philadelphia Newspapers, represented by Proskauer Rose and Dilworth Paxson, filed for Chapter 11 bankruptcy protection with the U.S. Bankruptcy Court in the District of Eastern Pennsylvania. The petition listed between $100 million and $500 million in assets and liabilities in the same range. The publisher of the Philadelphia Inquirer and Philadelphia Daily News was caught between the vice like grip of a debt laden balance sheet and declining advertising revenues. The company’s largest unsecured creditors include Royal Bank of Scotland, Airlie Opportunity Master and Bru Holding Co. Philadelphia Newspaper has secured a $25 million DIP financing commitment from a consortium led by Callowhill Partners and the court has approved interim use of cash collateral.

Spansion, represented by Latham & Watkins, and affiliates filed for Chapter 11 bankruptcy protection with the U.S. Bankruptcy Court in the District of Delaware. The petition listed assets totaling $3.84 billion and liabilities totaling $2.4 billion. The third largest maker of flash memory chips cited reduced and liquidity problems arising from the action rate security (ARS) imbroglio as contributing factors. The company’s largest unsecured creditors include US Bank NA and Wilmington Trust’s $457 million claims, Fidelity Research and Management Co’s $69 million claim, and ChipMOS Technologies’ $57 million trade claim. Spansion is in negotiations with its creditors to secure DIP financing.

Lyondell Chemical Co. has won court approval for its $8 billion DIP financing commitment. The recorded setting DIP is largest in U.S. history (so far).

M&A

Agrium, an agricultural chemical manufacturer, turned predator into prey with its $3.45 billion unsolicited cash-stock offer for rival CF Industries Holdings. The deal is conditioned up CF Industries terminating its bid for Terra Industries, approval of the offer by both companies’ boards and approval of the offer by CF Industries’ shareholders.

NRG announced that it is acquiring Reliant Energy’s Texas-based retail electric business. The $288 million all cash deal will be finance with a $200 million “credit sleeve” that matures in 18 months. NRG’s management maintains that the deal is in no way structured to thwart the hostile takeover attempt of rival power producer Exelon.

Pelangio Mines Inc. announced that it has entered into a $125.2 million stock merger agreement with Detour Gold Corp.  Detour shareholders will own a majority of the new entity. Each company’s board of directors has approved and recommended the merger.

Who said that real estate transactions were dead? Omega Commercial Finance Corp. has a little life left in them yet and has entered into a $116 million stock purchase agreement to acquire the Los Corales Resort in Mexico from BBB Developments Mexico S de Rl de CV.

Debt Offerings

Abbott Laboratories issued and sold $3 billion of notes in two parts. In-house counsel and Mayer Brown represented the issuer and Skadden, Arps, Slate, Meagher & Flom represented the underwriters.

Chevron Corporation issued and sold $5 billion of notes in three parts. Pillsbury Winthrop Shaw Pittman acted as counsel to the issuer and Cleary Gottlieb Steen & Hamilton represented the underwriters.

PepsiCo issued and sold $1 billion of senior notes. Davis Polk & Wardwell acted as counsel to the issuer with respect to New York law and Womble Carlyle Sandridge & Rice represented the issuer with respect to North Carolina laws.

The FDIC met and considered revamping its popular Temporary Liquidity Guarantee Program (TLGP).  Under the program banks can issue debt backed by “the full faith and credit of the U.S. government” by paying the FDIC a fee. The FDIC was considering extending the maturity cap on insurable debt from around three years to 10 years, but settled on a more targeted expansion. The program originally precluded any convertible debt, but now allows for the FDIC’s backing to be extended to convertible debt that mandatorily converts into common shares on or before June 30, 2012. However, at this point there have been no new issuers.

Equity Offerings

HSBC launched the largest rights offering in U.K history. The issue totaled 5.1 billion shares priced at 254 pence each and raised £12.85 billion.  The bank will use the proceeds to fortify its subprime battered balance sheet. It plans to shutter most of its consumer lending business in the U.S.

Government Intervention

AIG reported a net quarterly loss of $61.7 billion, which is the worst quarterly performance in American corporate history to date. Even the $150 billion that the U.S. taxpayers have injected into the insurance giant couldn’t cushion this massive loss. So AIG has headed for the government till once again. In order to receive this third round of aid, the AIG had to agree to new terms to its government-sponsored restructuring plan, including:

• The Treasury’s preferred stock investments in AIG will be modified to more closely resemble common equity.
• A standby capital facility that allows AIG to raise up to $30 billion in capital by issuing non-cumulative preferred stock to the Treasury from time to time during the next five years.
• AIG’s outstanding Federal Reserve Bank of New York’s credit facility will be partially repaid with $26 billion in preferred securities of the holding company and securitization notes of up to $8.5 billion representing embedded value of certain of its U.S. life insurance businesses.

Citigroup announced that it will restructure its balance sheet by offering private shareholders the option to exchange common stock for preferred securities. The exchange will substantially increase the bank’s tangible common equity (TCE), which is basically an extremely conservative measure of a banks capitalization and represents what common equity would receive if a company was liquidated. The plan calls for the U.S. government to match the tendering shareholders up to a maximum of $25 billion and at the same conversion price. Citigroup has filed a term sheet offering to exchange up to $15 billion in preferred securities.

Fannie Mae, following the lead of fellow mortgage giant Freddie Mac, announced that its liabilities exceeded its assets by $15.2 billion at the end of 2008. It has submitted a request to the Treasury for $15.2 billion under the Senior Preferred Stock Purchase Agreement to plug its wounded balance sheet.

General Motors’ European-arm, known by the extremely innovative name of GM Europe, announced plans to spin off its Opel brand and operations. The deal requires €3.3 billion in aid from European governments to avoid layoffs and plant closings. However, Germany, Opel’s base of operations, is conditioning any aid on a restructuring plan that produces a sustainable business model. It remains to be seen how much flack any GM executives will encounter if they dare to fly to Berlin.

The Royal Bank of Scotland (RBS) reported a £24 billion loss, which is a record for a U.K. company. The company also reported that it would place up to £325 billion worth of dicey assets into a new asset insurance scheme enacted under the aegis of the Crown. Britain already owns 70% of the bank, as a result of earlier bailouts, and the company disclosed that the government stake could go as high as 95%.

Only one bank, First Merchants Corporation, announced participation in the Treasury’s Capital Purchase Program (CPP). However, focus is already shifting from the first dose of the Treasury’s economic medicine and switched to the Obama administration’s new two part program styled the Capital Assistance Program (CAP). Its major terms, released last week by the Treasury, include:

• The “stress test” will subject the largest 19 banks (with risk-weighted assets over $100 billion) to a “forward looking” assessment that will focus on a bank’s firm-wide potential losses over the next two years (including off-balance sheet obligations and contingent liabilities). The assessment results will not be released and must be completed by the end of April.
• Any bank that fails the test will have six months to raise private capital or the government will invest in the bank through the CAP. The government injection will not be explicitly limited and will come in the form of preferred stock that is convertible into common equity at a ten percent discount to the market price on February 9, 2009. The shares will mandatorily convert after seven years.

CAP money will come with a litany of strings attached such as executive compensation provisions, disclosure around the use of government funds and limits on dividends and acquisitions

Published: March 3, 2009